MADRID, June 20 (Reuters) - Spain will propose tax cuts for
workers and companies as part of a fiscal reform due to be
unveiled on Friday aimed at boosting the nascent economic
recovery, according to a source close to the Treasury Ministry.

The expected bill is Prime Minister Mariano Rajoy's main
structural reform this year and will include reducing tax breaks
to widen a tax base that generates one of the lowest revenue
takes in Europe.

By cutting taxes at the same time Rajoy is betting that will
help boost cash-strapped consumers' finances and that economic
growth will boost tax revenues, but the plan has been roundly
criticised by unions and economists.

The government will propose cutting the lower and upper
levels of income tax, while also reducing corporate rates for
large companies to 25 percent from 30 percent over the next two
years, the source said.

"The reform will be implemented in two tranches depending on
how the economic recovery evolves over the next few years," the
source said.

Unions say tax cuts are merely a populist measure ahead of
elections next year while some economists say economic growth is
not yet strong enough to justify tax cuts and the move risks
hurting the government's ability to meet its budget deficit
targets.

Spain has been in and out of recession since a 2008 property
crash which has left one in four workers unemployed and has put
thousands of companies out of business.

The burst housing bubble sent revenues from the once
lucrative construction and real estate sectors tumbling and
helped push the public deficit to near-unsustainable levels.

Over the last three years, the government has passed a slew
of unpopular tax hikes and deep spending cuts to bring down the
public shortfall and convince nervous financial markets it can
control its finances.

Rather than directly increase the country's tax revenue,
which fell to 36.4 percent of economic output in 2012, the
latest reform aims to widen the tax base by reducing available
tax breaks and make the most of the economic turnaround, the
government has said.

With Rajoy facing voters next year, and his conservative
People's Party (PP) suffering tumbling support in the polls
after years of austerity measures, the reform has been slammed
by some as political opportunism which could backfire.

"The fiscal reform is based on a scenario of strengthening
economic recovery, of which we have serious doubts," the head of
Spain's second-largest union UGT, Candido Mendez said this week.

Spain's economy is forecast to grow 1.2 percent this year
after shrinking, or stagnating, since 2009 and the government
has targeted a deficit of below 3 percent of output by 2016 from
6.6 percent of gross domestic product in 2013.

The Bank of Spain reiterated calls this week to increase
consumer taxes such as value-added tax (VAT) to boost cash flow
into government coffers, but the government has said it won't
raise VAT further after a 2012 hike.

The fiscal reform proposal will limit VAT hikes to health
products, as dictated by Brussels. It will advocate raising VAT
on health products to 21 percent from 10 percent currently. It
will also cut tax payable on income from savings, the source
said, but did not give details of what this would involve.
(Reporting by Paul Day; Editing by Susan Fenton)